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The New York Times reports (here) that federal prosecutors are looking at whether former American International Group CEO Maurice Greenberg engaged in market manipulation in AIG shares in February. According to the report, there is a tape of a telephone conversation between Greenberg and a trader at the company in which Greenberg orders the trader to purchase its stock at the time that the government issued subpoenas in connection with the General Re transaction that led to Greenberg's downfall. The government investigation focuses on whether the purchases were designed to manipulate the price of AIG's stock in the face of the negative publicity generated by the investigation. There is no lack of motive to keep the share price high, given Greenberg's large share holdings (including the 41 million shares he gave his wife a month later -- see earlier post here ("Do You Trust Your Wife?") and Form 4 here) and the even larger ownership held by Starr International Co. (12% of AIG's shares) and C.V. Starr & Co. (18.8 million shares), two entities led by Greenberg -- see AIG 2004 proxy statement here.

Market manipulation cases are notoriously difficult to prove, however, because they are all about intent and inferring it from everyday legal conduct can be quite difficult to establish. There is nothing illegal about a company buying its own shares, nor is there anything wrong about buying stock in the hope that it will increase in price -- that's what investing is all about. Unlike insider trading, in which the person purchases or sells to take advantage of undisclosed information, these purchases were contrary to the negative information. Unlike the easier link that can be made between material nonpublic information and subsequent transactions in insider trading, these transactions are not as easily identified as fraudulent. Greenberg was notorious for the attention he paid to AIG's stock price, but that's not unique among CEOs and is hardly proof of an intent to manipulate the market. This new front will likely prove problematic for Greenberg and AIG because it brings a different focus to the investigation, with the likely effect of prolonging an already complex, multifaceted probe. (ph)